David Wessel in today's Wall Street Journal: Washington is the Biggest Drag on the U.S. Economy
Housing is on its way back. Consumers are spending more readily. Nearly two-thirds of U.S. private industries are hiring. The stock market is up. The U.S. economy is healing, albeit slowly.
The economy is gaining strength, but Washington dysfunction stands as the biggest threat to a full healing. David Wessel reports. Photo: AP.
And then there's Washington.
The still-controversial labors of two presidents, George W. Bush and Barack Obama, and Congress—with a significant assist from the Federal Reserve—saved the U.S. from a repeat of the Great Depression.
'We have the Fed hitting the accelerator as hard as it can, and we have Congress doing the opposite," Illinois Sen. Dick Durbin, the Senate's No. 2 Democrat, said at a Wall Street Journal breakfast Wednesday.
Thank you very much, but what have you done for us lately? Basically offering more harm than help to an economy trying to recover.
At the insistence of Republicans, Congress is cutting spending now; Democrats have acquiesced to the across-the-board spending cuts of the much-feared sequester for the current fiscal year. At the insistence of Democrats, Congress has raised taxes this year.
Nearly all reputable economic forecasters agree that this combination means the federal government will subtract from growth this year. "We have the Fed hitting the accelerator as hard as it can, and we have Congress doing the opposite," the No. 2 Senate Democrat, Dick Durbin of Illinois, said at a Wall Street Journal breakfast Wednesday.
That might be worth the short-term pain if it were part of a long-term cure. It isn't.
Washington has done next to nothing on the big driver of long-term deficits—the growth in spending on benefits, particularly health care.
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And for all the professed affection for "tax reform" in principle, Congress—despite the groundwork laid by House Ways and Means Chairman Dave Camp (R., Mich.)—hasn't moved much toward a revamp of the tax code that would spur growth and reduce future deficits.
Oh, there is still talk in Washington about doing a big budget deal this year. But the prospects don't look good. Mr. Durbin, even when trying his best to put an optimistic spin on things, says the odds are less than 50%.
"It looks bad because it is," says Douglas Holtz-Eakin of the center-right think tank American Action, referring both to the deficit and the politics of Washington.
Sen. Dick Durbin (D, Ill.), a veteran of the Simpson Bowles deficit commission, put the chances of a bipartisan deal this year to tackle the budget deficit by restraining spending and raising taxes at less than 50%.
"We know something about how to solve the problem of big debt and bad growth," he argues. "What we've done is raise taxes, not reform them, and, attack core functions of government [such as national defense, research, education] while leaving transfer programs [health and retirement benefits] unchecked."
"We're doing it 180 degrees wrong," he adds. "Other than that things are good."
The governments of Europe aren't any better. It's a striking sign of the times that among the world's biggest industrialized economies, the government of Japan—long criticized by others for not attacking its economic woes—is the one getting unaccustomed applause for its policies.
"I don't remember a time when in the West, populations were losing [so much] confidence in the established political order," Mohamed El-Erian of bond-manager Pimco said at a Stanford University forum last week.
In the U.S., he said, the problem is polarization. "We go from one crisis to another and we never emerge stronger," he said. "There's no trust in Washington and there's no enforcement mechanism because we're not in a crisis."
The financial markets are unperturbed. Why? Perhaps because the Fed is holding interest rates down and, thus, chasing investors into stocks. Perhaps because corporate profits have been doing so well. Perhaps because the market is shortsighted.
So where do we go from here? The near term looks OK. The dysfunction in Washington is overwhelmed by the increasing vitality of the private sector and the buoyancy of the markets.
But after that? Mr. El-Erian sketched two scenarios in the Stanford forum.
One is a happy ending. The Fed and other central banks manage to exit their aggressive, unconventional policies. The pace of economic growth quickens. Unemployment falls. Confidence returns. There is what Mr. El-Erian called a transition from government-assisted growth to "genuine growth." The politics get less stressful.
The other is painful. "The healing never reaches critical mass," he said. The economy "doesn't get better fast enough," but the Fed and other central banks decide that the risks of their policies exceed the benefits and they pull back. The politics, in this scenario, are ugly.
After Mr. El-Erian left the hall, Glenn Hubbard, dean of the Columbia Business School, jokingly summarized the bottom line: "You will be wealthy or wiped out with roughly equal probabilities."
As the crowd laughed, I emailed Mr. El-Erian and asked him to put probabilities on the two outcomes. He didn't exactly take the bait, but replied: "The timing element is important."
If there's a big geopolitical shock—from the Middle East, perhaps, or from North Korea—or if there's "a serious political breakdown in Europe," then there's a higher chance that the U.S. takes the bad fork. If, on the other hand, there's no such crisis, he said, then the slow healing of the U.S. economy continues and there's a substantially better chance that the U.S. ends up on the good fork.
In other words, we have to be lucky.
Write to David Wessel at capital@wsj.com
